financial essentials for growing your business
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“Financial Essentials for Growing Your Business”
Understanding Financial Statements
• Objectives– Describe the 3 primary financial statements
and what they mean to a business
– Introduce ratios & proportions
– How to get better productivity from your expenses
Understanding Financial Statements
• 3 Basic Financial Statements
1. The Balance Sheet
2. The Income Statement
3. The Cash Flow Statement
Understanding Financial Statements
Balance Sheet
Understanding Financial Statements
Understanding Financial Statements
Understanding Financial Statements
Understanding Financial Statements
• Ratios– Liquidity Ratios – measure the amount of cash available to
cover expenses current and long term
Current Ratio – should be 2 x or 200% of current liabilities
Quick Ratio = cash + A/R
Current Liab. (B/S & IS)
– Turnover of Cash Ratio – or working capital, if maintained at adequate levels this is what can finance sales
Sales should be 5 or 6 times working capital
Turnover of Cash Ratio =Net Sales
Working Capital (B/S & IS)
– Debt to Equity Ratio – the relationship between capital contributed by creditors (banks) that loan cash and owners equity remaining in the business
• CL to net worth should not exceed 80% & LT debt should not exceed 50% or creditors may want to have a say in how the business is operated or an ownership interest
Debt to Equity Ratio = Total Debt
Equity
Understanding Financial Statements
• Summary
Liquidity ratios – ability to pay debts
Current ratios – ability to pay immediate bills
Working capitol – difference between CA and CL
Total LT debt should not exceed 45% of NW
Understanding Financial Statements
• Rate of Return on Sales Ratio– Operating income/Net profit – indicates if sales can cover cost
and leave an acceptable profit Rate of Return on Sales Ratio = Operating Income
Net Sales
• Rate of Return on Assets Ratio (ROA)– Income/Profit - generated by the assets
ROA = Income Before TaxesTotal Assets
• Rate of Return on Investments (ROI)– Used to determine whether or not to invest in a company
ROI = Income Before TaxesNet Worth
Understanding Financial Statements
• Summary of Profitability Ratios
Profitability ratios - measure return on sales, return on assets and return on investments
Profitability – your price structure, sales, and controlling expenses.
Ratios- used to compare with industry average
ROI- may be compared as RONW to total assets
Understanding Financial Statements
• How to get better productivity from your expenses– Understand Sales – why made or not made– Understand COGS – increase or decrease %
of net sales– Credit & Collections – reduce time (commitment of
cash & collection of cash)
– Fixed Expenses – occurs if sales made or not– Variable Expenses – Tied to sales volume
Understanding Financial Statements